The Best Strategy to Profit in this Bear Market

03/30/2020 2:00 pm EST

Focus: STRATEGIES

Mike Turner

President, Turner Capital Investments

If you listen to the financial “pundits”, you’d think the only way to get through this bear market is to close your eyes and wait for the market to rebound (by the way, a synonym for pundit is “guesser”). “After all, the market always comes back” is their mantra.

Maybe, but “always comes back” can take years, even generations. Take a look at what happened after bear market declines in the past.

The bear market that began in 1929 lost 84% of its value and took 25 years to recover! It finally got back to 1929 levels in 1954.

The bear market that began in late 1965 lost 72% of its value and it took 17 years before the market finally surpassed the 1965 levels.

And the two bear markets in the first decade of this century, 2000-2002 and 2007-2009, lost 37% and 50% respectively. It wasn’t until almost 2013 that the market finally surpassed late 1999 levels.

You might look at these numbers and say that, well, with today’s computerized trading, it’s obvious that this bear market is going to be similar in length to the most recent one. And let’s assume you’re right. Let me ask you a simple question…

Do you have another 12 years just to get back to even?

If you’re in your 20s, 30s, 40s, or even your early 50s, maybe you have time, but if you’re near or in retirement, you can’t afford to wait and “hope” the market comes back and “hope” you’ll have enough money to live on. What are you going to do?

Let me tell you what I’ve been doing. I’m Mike Turner, the founder of Turner Capital Investments LLC in Austin. I manage money for individuals and small institutions. If you don’t know me, I invest my clients’ monies using computer algorithms that I have personally designed, tested and used for decades. I don’t try to guess where the markets are going to go in the future. These algorithms got me out of our long positions in mid-February, just BEFORE the huge sell-off in the market that began on February 21 when the coronavirus rampage was beginning. We’re still holding onto those gains (and growing them) while the rest of the market has been tanking. Our flagship portfolio is up over 6% for the year in spite of the bear market.

What should you consider doing to benefit from the downward moves in the markets? Consider checking out the inverse ETFs. In a nutshell, inverse ETFs move higher in price when the underlying indices move down in price. There are inverse ETFs that track major market indices as well as sectors and industries. Let’s look at an example of how an inverse ETF works.

This is the chart for the past three months of SPY, the ETF that tracks the S&P 500. You can see the high was made in the middle of February and then dropped off dramatically.

SPY Technical

The high closing price for SPY was $337.60 on February 14th. It fell in price more than $100 and hit its most recent closing low just 5 weeks later on March 20th at $228.80. By the way, the yellow channel is what I call the “Neutral Zone”. When a stock is above the Neutral Zone, it’s in a bullish condition. When it’s below the Neutral Zone, it’s in a bearish condition.

Now look at SH. This is the inverse ETF for the S&P 500. Take a look at how it has risen in price as the S&P 500 has fallen.

Neutral Zone

You can see that the most recent high price on SH coincides with the low price on SPY. And it’s not surprising to see that SH is trading above the Neutral Zone, which is a bullish indicator for this inverse ETF.

I’ve been investing my money and my clients’ monies in a basket of inverse ETFs to take advantage of the decline in the markets. But, and this is the most important thing to understand, I make very small investments in these inverse ETFs.

I refuse to try to hit home runs with the market is in such turmoil… that’s just too risky. The volatility of bear markets is large multiples of the volatility in bull markets. As we saw previously in the 2007-2009 bear market as well as last week, it’s possible for the markets to move dramatically higher during bear markets. But, with an eye toward keeping risk low, growing capital with inverse ETFs in a bear-trending market can be a smart move.

If you want to see what I’m talking about, I’ll be hosting a critical meeting for my clients (and other interested investors) on Saturday, April 4th, at 2 pm EDT. If you’d like to learn more about how you can take advantage of this bear market, click here to register.

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